From client to competitor: China's rise prompts German rethink

BERLIN, Jan 15 (Reuters) - As a golden era for its exporters fades, Germany is scrambling to secure its interests in Beijing, but China's transformation from customer to competitor is forcing Europe's largest economy to make changes at home.

China has been crucial to Germany's recent expansion, sucking in German cars and industrial goods to create the infrastructure that has allowed it to grow into the world's second-largest economy.

But the great export boom, turbocharged by the euro replacing the stronger deutschmark, is fading as China moves up the value chain and innovates faster than many German firms, which are also caught in the crossfire of U.S. President Donald Trump's 'America First' trade policies.

Foreign trade acted as a drag as imports grew faster than exports in 2018 and the German economy posted its weakest growth in five years, official figures showed on Tuesday.

While German exports to China still grew by nearly 10 percent year-on-year from January to November, Chinese demand for 'Made in Germany' goods is waning.

"The business outlook for German companies in China is getting clouded," said Volker Treier of Germany's DIHK Chambers of Industry and Commerce. In November alone, German exports to China grew only by 1.4 percent, Treier said.

A general cooling of the Chinese economy and the uncertainty caused by the U.S. tariff dispute are hurting Sino-German trade.

With German industry pressing for a more robust approach to China, Finance Minister Olaf Scholz heads to Beijing this week to seek better access for his country's businesses, especially banks and insurance companies.

German policymakers and business executives say China's state-driven economic model leaves them at a disadvantage.

With its "Made in China 2025" plan, Beijing is pushing domestic development of technologies such as electric cars. Abroad, it is buying know-how through acquisitions of firms such as German robotics maker Kuka.

Berlin stresses its "close and advantageous trade relations" with China, whose rise has demoted Germany from third biggest economy in the world to fourth.

"At the same time, we are increasingly looking to better protect and strengthen sensitive German and European business sectors from state-run strategic overseas acquisitions," an Economy Ministry spokeswoman said.

In an unusual move, Germany's influential BDI industry association last week called for tougher European Union policies towards China and urged companies to rely less on the Chinese market.

TOUGH TALKS

Chancellor Angela Merkel prefers to resolve differences with China through dialogue, rather than adopting Trump's approach of threatening trade tariffs.

In this spirit, Scholz will seek to persuade Vice Premier Liu He that Beijing should be more open to foreign firms.

Scholz is expected to use the talks to tell China that it is in its own interests to further open up its economy and create mutually fair conditions for trade and competition, and to ease tensions with the United States.

The question is whether Beijing shares this view.

China's mix of state aid for domestic companies and restrictions on foreign firms has helped Chinese manufacturers to dominate the local market for electric vehicles, giving them a springboard for large-scale exports.

The challenge is illustrated by Volkswagen's plan to invest billions of dollars in electric vehicles over the next few years, part of a $300 billion surge by global automakers with nearly half of the money targeted at China.

Herbert Diess, chief executive of VW, which has decades-old joint ventures with two of China's largest automakers, has said: "The future of Volkswagen will be decided in the Chinese market."

During his visit in Beijing from Thursday to Friday, Scholz will push for Germany to become a centre for Chinese and renminbi-denominated financial products in Europe.

Germany hopes to benefit from Britain's decision to leave the EU as banks shift some operations from London to Frankfurt.

GERMAN HOMEWORK

At home, Germany is responding to China's emergence as a competitor with moves to protect its knowledge economy and stimulate the domestic demand it needs to promote growth as exports wane.

Pivoting to domestic-driven growth is a major shift for Germany, whose post-war 'economic miracle' was largely export-driven.

Last month, the government agreed tougher rules for screening and even blocking purchases of stakes in German firms by non-Europeans to fend off unwanted takeovers by Chinese investors in strategic areas.

Germany also wants to use some of its export-generated budget surplus to fund domestic stimulus and rebalance the economy.

Child benefit is due to rise this year, and legislators from Merkel's Christian Democrats (CDU) have discussed new tax cuts.

Annegret Kramp-Karrenbauer, who succeeded Merkel as CDU leader late last year, and Economy Minister Peter Altmaier say tax cuts should be used as a stimulus to pre-empt a possible downturn.

"The fiscal measures currently implemented and discussed by the government will surely give the economy a push this year," said Stefan Kipar, head of economic research at BayernLB.

"So there is some rebalancing taking place, with domestic demand sucking in more imports, but the fiscal measures so far agreed by the cabinet are probably not enough to give the euro zone economy as a whole a really big push."

Thomas Gitzel from VP Bank agreed. "Now is high time for the government to start a broad infrastructure spending programme," he said. (Additonal reporting by Michael Martina in Beijing Editing by Paul Carrel and Giles Elgood)